The government’s ability to successfully push through the draft National Elderly and Basic Pension Act to garner a first reading — the first stage of a bill’s passage — or acceptance of the principle of the bill from the House of Representatives is considered a crucial cornerstone for building a support system for Thailand’s elderly population.
The main principle is to amend the existing Act on the Elderly to change the system of providing support payments to the elderly from a “livelihood allowance” to a “pension”, so people reaching the age of 60 can receive a secure monthly income from the state.
The pension shall be paid as a monthly income, with the pension rate not lower than the poverty line as determined by the National Economic and Social Development Council (NESDC).
A national basic pension plan should be reformulated every three years, with a National Basic Pension Fund established for the exclusive purpose of funding national basic pension welfare expenditure.
The sources of funding are available from an initial sum of capital allocated by the state, funds received from the fiscal budget expenditure, and supplementary funds from excise taxes on alcohol, tobacco, fuel oil, vehicles, or other taxes as determined by the finance minister.
However, a key question is whether the government has sufficient funds to support it, especially as its fiscal space has significantly diminished following the Covid-19 pandemic.
The Fiscal Policy Office (FPO) has indicated that the remaining fiscal space is insufficient to support potential future crises.
Additionally, the ageing population continues to exert pressure, leading to a decrease in GDP and impacting future government revenues.
Pornchai Thiraveja, the FPO’s director-general, said Thailand has rapidly entered an ageing society due to demographic changes resulting from a continuous decline in birth rates since 2014.
In 2014, there were 777,000 births, while in 2023, the number dropped to about 500,000.
More importantly, advancements in medical science have led to an increase in life expectancy.
In 2014, the average life expectancy for females and males was 78.2 and 71.3 years, respectively, with the rates increasing continuously since then.
In 2023, the average life expectancy for females and males was about 81 and 75 years, respectively.
According to Mr Pornchai, Thailand has fully entered an ageing society, where the population aged 60 and above has exceeded 10% of the total population since 2005.
In 2023, Thailand also became an “aged society”, with the elderly accounting for 20% of the total population. The number of elderly people tallied 13 million as of Dec 31, 2023, according to data from the Department of Older Persons.
THAILAND’S VULNERABILITY
Being in an ageing society will impact the income and expenses of the government, as well as fiscal stability, as government revenue collection will decrease due to the declining workforce.
This may affect productivity and economic growth rates and may also result in a decrease in the number of taxpayers from the primary group.
According to Mr Pornchai, government expenditure on elderly care will increase, primarily in two main areas: 1) providing income assistance to the elderly, requiring the government to increase expenditure budgets to provide financial assistance for the post-retirement livelihood of the population, such as pensions, retirement benefits and elderly living allowances, and 2) spending on public health and social services for elderly care.
Over the past five years (2019-23), expenditure budgets for welfare, retirement and healthcare have increased by an average of 5.15% per year. However, without appropriate preparedness, this increase will strain government finances, affecting the care of the growing elderly population and income growth, said Mr Pornchai.
Entering an ageing society may lead to a decrease in GDP growth rates due to a reduced workforce, a crucial factor in production, and potential labour shortages may drive up wages, leading to inflationary pressures, according to Mr Pornchai.
CURRENT MEASURES
The government has placed great importance on the ageing society, particularly concerning “income security” after retirement for the elderly.
The state has established a retirement savings system as a social security to ensure people have financial stability in their later years and sufficient income to sustain their livelihood in old age.
Thailand has applied various pillars of the multi-pillar saving system from the World Bank, resulting in diverse formats of the current retirement system.
These include government-provided elderly welfare, mandatory and voluntary savings, allowing workforce participation in retirement savings through various savings funds for old age such as the Social Security Fund, Government Pension Fund, Provident Fund, National Savings Fund and Retirement Mutual Fund. Additionally, the government offers tax benefits for retirement savings through these funds.
Furthermore, the Finance Ministry has implemented various measures to support the elderly, such as offering reverse mortgages, constructing senior complexes on government land and providing tax benefits to companies or corporate entities employing elderly individuals aged 60 and above.
According to studies by the World Bank and Deloitte & Touche Consulting Group, income that is sufficient for sustaining livelihoods and maintaining a basic standard of living should have a post-retirement income replacement rate of about 50-60% of the final month’s salary.
For Thailand, if individuals aim to maintain a quality of life similar to pre-retirement years, post-retirement income should ideally be at least half of the pre-retirement income, following international standards.
STATE FISCAL STABILITY
In establishing a retirement system for the elderly, the government must carefully consider and weigh various fiscal constraints to avoid impacting the country’s fiscal stability. One primary constraint to consider is the government’s expenditure structure.
Data from the Fiscal Risks Report for fiscal 2023 indicates that Thailand had a difficult-to-reduce expenditure worth 2.14 trillion baht, accounting for 67% of the annual budget expenditure.
This suggests that the government has limited flexibility in allocating budgets for other projects, with only about 33% remaining for other expenditure.
Additionally, a portion of the remaining fiscal space (33%) is earmarked for investment purposes, requiring investment expenditure to be no less than 20% of the budget expenditure and not less than the deficit amount specified in the budget law.
Therefore, any additional budget allocation for elderly welfare must consider this limited fiscal space amid the necessity to develop other economic and social aspects, said Mr Pornchai.
The second constraint is the legal limitation on government borrowing.
According to Section 21 (1) of the Public Debt Management Act of 2005, borrowing to offset the budget deficit or when expenditure exceeds revenue for any fiscal year must not exceed 20% of the annual budget expenditure enforced at that time, along with any additional budget expenditure.
For fiscal 2023, the government has set the deficit framework at 693 billion baht, while the legal borrowing limit stands at 790 billion baht. This means the government can borrow up to 100 billion baht for additional spending.
The third constraint is the credibility of the government’s fiscal condition. Although the government is eligible to borrow for additional spending, such borrowing must consider the cost-effectiveness and risks that may affect the credibility of the fiscal status.
At the end of fiscal 2023, public debt stood at 62.4% of GDP, and according to the medium-term fiscal plan for the fiscal years 2025-28, it is projected to increase slightly to 63.6% of GDP by the end of fiscal 2028.
While this remains below the State Monetary and Fiscal Policy Committee’s limit set at 70%, it reflects that the government still has room for additional borrowing of only about 7% of GDP, which is considered not excessively high and may not be sufficient to withstand any large-scale crises that may occur.
Therefore, borrowing for the development of elderly welfare could further reduce such fiscal space and potentially impact the country’s fiscal credibility in the future.
In principle, according to Mr Pornchai, government borrowing should be aimed at investment for the country’s development to generate long-term economic returns, leading to a reduction in future reliance on government budgets.
Therefore, if the government deems it necessary to enhance elderly welfare, it should consider increasing revenue collection capacity through tax structure reform, reviewing tax exemptions and reducing unnecessary tax deductions as needed to ensure an adequate source of funding for welfare measures without compromising the fiscal credibility of the country, he said.